Can I give away my home to avoid tax?
Are you considering gifting your house to your children while you're still living in it?
You can give your house away to your children and continue living in it. BUT… and its a very big BUT… have you considered all the disadvantages?
7 (major) disadvantages
It might seem like a generous gesture, ensuring your loved ones benefit from your hard work and investment. However, before you sign over the title deeds to the family home, it's essential to consider the potential downsides.
Here are seven compelling reasons why giving your house to your children while you're alive might not be the best idea:
Loss of Control:
When you transfer ownership of your home to your children, you relinquish control over its use and management. While you may trust your children implicitly, unforeseen circumstances or disagreements could arise, leaving you with a limited say in how your home is maintained or sold.
Legal and Financial Risks
Transferring ownership of your house can have significant legal and financial implications. You may encounter tax issues, potential disputes with other family members, or complications if your children face financial difficulties or divorce in the future.
If you continue to live in the property without paying your children a market rent, HMRC would consider the gift to be a sham. It’s called a Gift with a Reservation of Benefit (GROB). The tax man would treat the property as yours when you die.
If one of your children were to become bankrupt, the property would be part of their assets and could be claimed by their creditors. You could lose your home.
In the same way, if one of your children were to divorce, your home is part of their assets. It might have to be sold as part of a financial order.
Impact on Eligibility for Assistance
If you require long-term care or financial assistance in the future, transferring ownership of your home could affect your eligibility for certain benefits or support. Your local authority is likely to consider the gift a ‘deliberate deprivation of an asset to avoid paying for care’. As a result, they will include the value in your means-testing assessment. You would be no better off than before you gave away control and ownership.
Unforeseen Circumstances
Life is unpredictable, and your circumstances may change unexpectedly. What if you need to downsize, move to a more suitable location, or require additional funds for medical expenses? Giving your house to your children could limit your flexibility to adapt to changing needs.
Inequity Among Children
Dividing assets fairly among your children can be challenging, especially if the value of your home represents a significant portion of your estate. Transferring the house to one child may cause resentment or conflict among siblings, particularly if other assets are not distributed equally.
Potential for Exploitation
Unfortunately, transferring ownership of your home to your children could make you vulnerable to exploitation or coercion. This is especially true if you become dependent on them for care or support. It could lead to disputes or legal challenges down the line.
Estate Planning Considerations
Giving your house to your children can complicate your estate planning process. It's crucial to consider how this decision aligns with your overall estate planning goals and whether there are alternative strategies that better suit your needs and objectives.
While the idea of giving your house to your children while you're alive may seem appealing, it's essential to weigh up the potential risks and consequences carefully.
Before making any decisions, consult with a legal or financial professional who can provide personalised advice based on your specific circumstances. Remember, protecting your assets and ensuring your long-term financial security should be top priorities as you plan for the future.
And one more reason…
Loss of First-Time Buyer Status
Accepting ownership of their parents’ home could result in your child losing his or her status as a first-time homebuyer. First-time buyers are usually eligible for special incentives, such as reduced deposit payments, lower interest rates, and government assistance like the Help to Buy ISA scheme.
By inheriting the ownership of your property, your children may forfeit these valuable benefits when they eventually decide to purchase their property. Losing first-time buyer status could significantly impact their ability to afford a home. It could also limit their access to favourable financing options, potentially delaying their entry into the housing market or increasing their financial burden.
If your mum or dad suggests gifting their house to you to avoid paying for care or inheritance tax, you must consider the long-term implications carefully.
What are the alternatives to gifting property to children?
Depending on your reasons for gifting the property, other options are available to you.
You may decide to sell your property and gift the sale proceeds to your children. If you were to die within seven years, this gift would still be subject to inheritance tax. You’ll need to find somewhere else to live and have enough income to pay rent and bills.
Safeguarding assets from care home fees
It is possible to protect your assets from being used to pay for your spouse or partner’s care home fees.
You can use your Will to plan for the future.
If you leave everything you own to your spouse or partner, those assets belong to them and will be part of their estate. This means they will be included in your partner’s means-testing assessment. If care costs are on your mind, simple mirror Wills are not the answer.
Life interest Will trusts
By leaving your partner a life interest in your assets, you can ensure they are provided for during their lifetime. The Local Authority cannot include your asset held in a trust in your partner’s financial assessment - but your partner will have the benefit of those assets for as long as they need.
By setting up a life interest trust in your Will, once your partner leaves your shared home and it is sold, the portion of the property that was yours will pass under the terms of your Will.
Creating a trust in your Will is not deliberate deprivation because the gift does occur until you die. You cannot deprive yourself of an asset if you are no longer living. You do not have to use your assets to pay for your partner’s care, but a Will trust can be flexible if you want to allow your trustees to do so. They might consider this if any state-funded options are unsuitable.
If you and your partner both need care, the property will be included in any Local Authority means testing assessment. Being a tenant in common does not provide any protection - it is simply a different way to own property jointly and means you can gift your share in your Will.
Key takeaways
There can be unintended financial consequences if you gift your home to your children and continue to live there.
A Will trust can protect your share of the family home from being used to pay for your spouse or partner’s care home fees (if you were to die first).
Your options depend on your personal situation and family arrangements.
Seek advice if you are considering gifting property to your children.
If you’d like to discuss other options for protecting the value of the family home for your children, contact us today.
